After inflation peaked in early 2022, the Federal Reserve repeatedly stated that its goal with aggressive interest rate hikes was to get inflation down to an annual target range of 2%. Well, it's almost there.
Today's Consumer Price Index, measuring the cost of food, housing, gas, utilities and other goods in the month of September, shows annual price growth at 2.4%. Though that's slightly higher than what markets expected, it still marks the lowest pace since early 2021. Core CPI, which excludes volatile food and energy costs, rose by 3.3%, also just above expectations.
The big question is how that figure will influence the Fed's actions at its next monetary policy meeting on Nov. 6-7. The Fed cut interest rates by 0.5% on Sept. 18, marking what we anticipated would be the first step to lower borrowing costs.
But market watchers aren't expecting another jumbo interest rate cut next month. Some even say the Fed won't cut rates at all.
The Fed's two main goals are to maintain maximum employment and contain inflation. Even if prices for goods and services are no longer hitting record highs, the economy is giving mixed hot-cold signals.
The most recent employment report from the Bureau of Labor Statistics showed US hiring exploding past expectations in September. Instead of greater jobless numbers, the unemployment rate ticked down slightly. The outlook now seems like an about-face from August's economic data, which stirred up recession fears and prompted the Fed's larger-than-expected rate cut.
"Although the Fed remains vigilant on inflation, the labor market has risen to the fore. The Fed does not want the labor market to go from soft to spoiled," said Charles Doughtery, senior economist at Wells Fargo.
Experts agree that the Fed can and should continue lowering interest rates. But given that the labor market isn't going off a cliff, it doesn't need to happen at a breakneck pace. In other words, there's no longer an urgency for an aggressive cut.
A shallow 0.25% rate cut at the next meeting could allow inflation to continue easing and avoid a job-loss recession, helping the economy find a "soft landing," according to Beth Ann Bovino, chief economist at U.S. Bank. "Since landings are often the riskiest part of any flight, the Fed will need to be alert for any looming concerns," Bovino said.
While unemployment is still historically low, it's increased steadily from last year, and the Fed shouldn't risk it going any higher. At the same time, Bovino noted that "it's becoming harder for many households (particularly low-income households) to continue to pay higher prices for groceries, utilities and housing."
What smaller Fed rate cuts mean for your money
The Fed's interest rate cuts have a two-fold impact on your wallet. Interest rate cuts affect the cost of borrowing money, whether with a loan or credit card. They also determine how much you earn on the money you deposit in a high-yield savings account or certificate of deposit.
As the Fed eases interest rates, you'll be charged less to borrow money. You'll also see smaller returns on your savings.
However, the Fed isn't slashing interest rates all at once. Over the next 18 months, the Fed will make incremental adjustments to rates, likely by 0.25% at a time. And it will take time for those policy changes to trickle through the economy.
According to Bovino, the size of one rate cut, whether it's 0.25% or 0.5%, won't be felt by most US consumers in the near term. Financial institutions are often quick to raise the cost of borrowing but slow to lower it to maximize profits.
"Since credit cards respond more slowly to Fed policy than mortgage rates, households, particularly low-income households, who have increasingly relied on credit cards to cover costs, will continue to feel affordability strains in the near term," Bovino said.
The Fed doesn't directly set mortgage rates, but its policy adjustments and economic outlook influence rate movement. For example, though rates on home loans fell precipitously this summer in anticipation of a rate cut, they've already gone up again. Smaller interest rate cuts mean mortgage rates may not see significant declines in the near term.
For savers, many banks have already lowered their annual percentage yield on savings and CDs. Since the Fed is expected to take its time reducing rates, you can expect another few months of better-than-average returns on your deposits.
Overall, cooler inflation and interest rate cuts create a bit more breathing room in household budgets.